What is leverage and margin?

What is actually margin and leverage? Does it means borrow large sum of money from the program and bet in market? If everyone win, would the trading progam bankrupt?

Excerpt from Marketiva:

Margin Requirements

As you know, the margin deposit is not a down payment on a purchase. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows you to hold a position much larger than your actual account value. Forex online trading platforms have margin management capabilities that allow you to get as much as four times the leverage of a typical futures contract. The trading platforms often perform automatic pre-trade checks for margin availability, and will execute the trade only if you have sufficient margin funds in your account. These systems also calculate the funds needed for current positions and display this information to you in real time.

For example, a broker might require only $1,000 in the trader's account in order to trade a 100,000 EUR/USD currency position. The $1,000 is referred to as "margin". This amount is essentially collateral to cover any losses that you might incur. Since nothing is actually being purchased or sold for delivery, the only requirement, and indeed the only real purpose for having funds in your account, is for sufficient margin.

Margin should reflect some rational assessment of potential risk in a position. For example, if a currency is very volatile, a higher margin requirement would normally be justified.

In the event that funds in your account fall below margin requirements, most forex platforms will automatically close one or more open positions. This prevents your account from ever falling below the available equity even in a highly volatile, fast moving market.

Leverage: http://www.trade2win.com/traderpedia/Leverage
Margin: http://www.trade2win.com/traderpedia/Margin

To understand the meaning of margin and leverage Think of your broker as a bank who basically fronts you $100,000 to buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit, which he will hold you for but not necessarily keep.

Sounds too good to be true? Well this is how forex trading using leverage works.

The amount of leverage you use will depend on your broker and what you feel comfortable with.

Typically the broker will require a minimum account size, also known as account margin or initial margin.

Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded.

For example, for every $1,000 you have, you can trade 1 lot of $100,000.

So if you have $5,000 they may allow you to trade up to $500,000 of Forex.

The minimum security (margin) for each lot will vary from broker to broker.

In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.

Leverage allows traders to borrow money and use that money to invest in the foreign exchange market.

Because of leverage, clients without a huge amount of capital are able to make large investments, whereas in other markets such as the equities market, clients would have to pay 50% of the full amount for each share of stock they were investing in.

Most market makers allow positions to be leveraged up to 100:1. This means that if a trader wanted to buy a “lot” worth $100,000, with 100:1 leverage the trader only has to put up $1,000.

Leverage is about risk. Increasing your leverage increases both your opportunity to take bigger profits AND rack up bigger losses.

fxfxforex said:

Most market makers allow positions to be leveraged up to 100:1. This means that if a trader wanted to buy a “lot” worth $100,000, with 100:1 leverage the trader only has to put up $1,000.

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At maximum leverage of for example 100:1 you will get knocked out immediately if the price moves against you.

Margin + Leverage = Possible Deadly Combination

Trading currencies on margin lets you increase your buying power.

This means that if you have $5,000 cash in a margin account that allows 100:1 leverage, you could trade up to $500,000 worth of currency because you only have to post one percent of the purchase price as collateral.

Another way of saying this is that you have $500,000 in buying power.

With more buying power, you can increase your total return on investment with less cash outlay. But be careful, trading on margin magnifies your profits AND losses.